Worried About Economic Collapse and Your Retirement? Here’s Some Food for Thought

The last question in this morning’s reader mailbag left me thinking. Let me repeat Alan’s question again, for all to read.

“I’ve been putting away the maximum amount I can for retirement for the last six years. I’m 29 and I already have almost twice my annual salary saved for retirement. Problem is I can’t stop checking the balance and I constantly feel sick that everything is going to collapse and I’ll lose everything.”

My original response to Alan’s question is that he was simply exhibiting a nervous tic that revolved having that much money in one place and that by loosening his grip on it a little (by making it a personal goal to check it less often), he could improve his peace of mind.

After reflecting on his question a bit more and reading a recent deluge of emails from other readers, I began to see a different concern in his question. Alan’s worry may be less focused on the daily ups and downs of his account and perhaps more focused on the omnipresent worry that many people have regarding total economic collapse.

As I’ve stated many times on The Simple Dollar, I’m not really worried about an economic collapse. There are too many hard working, creative, entrepreneurial Americans out there to see the economy fall into complete shambles. Every day, I hear of another company with a great idea launching. This summer, I witnessed four different home service businesses opening up in my small town, along with several other businesses. I know people in basically every generation, from the Greatest Generation on down to the millennials, who have incredible work ethics and entrepreneurial drive.

The only time you’ll find me worried about economic collapse is when all of those people stop working, and I haven’t seen it.

Yes, there are people who don’t want to work, but there have always been people who didn’t want to work and have lived off of the work of others. Yes, there are unemployed people, but many of them either don’t want to work and are happy barely scraping by or they’ve set their standards for employment unrealistically high.

If you doubt me, how about The Economist? In this article, the author discusses what would have to happen to cause hyperinflation to occur in the United States.

To summarize, the only way this could happen is if one of the special interest groups were to accumulate enough power as to cause every other interest group to go bankrupt just to maintain their own wealth. Given the huge number of overlapping interest groups in this country, that’s impossible, as we’re all too paranoid about losing our piece:

“Hyperinflation is really, really, really unlikely to occur in America. We can talk about how American government is gridlocked and Congress is robbing future generations by accumulating massive debts, but the fact remains that the development of hyperinflation in America implies a breakdown in governance so complete that a single man or interest can drive everyone else to destitution in order to keep its share of the spoils from shrinking. This, in a country where the government freaked out about the deficit and almost instantly balanced the budget in the 1990s, in response to a 10-year Treasury rate just a shade above 7%, and in which the government is freaking out about the debt and actively reducing the deficit now despite a 10-year Treasury rate around 2%.)”

Still… let’s say that it was coming. Let’s say that, in 2014, we’ll see 5,000% inflation. What would happen?

Here’s a tip: your retirement balance would not be a major worry.

What I describe below comes from descriptions of the events in Chile in the early 1970s, Zimbabwe in the last decade, and the Weimar Republic in the 1920s. The pattern was the same in each situation.

One of the first things that would happen is that a black market would spring up in your neighborhood. If, suddenly, a loaf of bread cost $40 on the shelves while everyone’s pay stayed the same, people will start trading for bread instead of buying it.

What will they trade for? A “currency” of some form will arise, but it’s hard to say what it will be. It might be gold, but it could also be other items: skills, for instance, or the Chinese yuan or the Euro or some form of scrip. Different “currency” might be accepted in different areas. There would also be a barter economy of some kind.

While this is happening, the stock market and most other markets would completely collapse. Every investment house where your money is “safe” would either be in an incredible lockdown mode or be completely out of business.

In other words, if a true economic collapse happened, your retirement savings would likely completely vanish and, if they didn’t, they would be drastically devalued in the short term.

What about the long term, though? In each of those examples, a “new normal” eventually arose after a few years. The companies that survived the collapse stuck around and picked up the pieces. Many of those companies saw thousand-fold increases in their stock value as a new stock market arose and people wanted in on those companies that made it. Lots of new companies would pop up to service people’s needs. A government of some form would arise as it’s in the best interest of all of these companies to have basic protections and a form of exchange.

If your investment house survived at all, your retirement would begin to rebound, in other words. Chilean blue chip companies – those that survived – rebounded a thousandfold in the 1970s after the hyperinflation. The same thing happened in Germany in the 1920s.

If you are truly worried about an economic collapse, the best things you can have are skills, food, land, tools with which to produce your own food, and perhaps a small amount of gold in your hand (though too much would make you a target). I’d put skills and tools at the top of this list, with land and food right behind them. A bit of gold would be nice in the short term, but I would be worried deeply about security if I had very much of it at all and I would have no guarantee that it would be an accepted currency in whatever black market would develop locally.

The best part? Skills, tools, and land are a good thing to have regardless of whether you fear an economic collapse or not. They make sense from a frugality perspective.

To put it all simply, Alan’s constant refreshing of his retirement balance is completely useless if he’s worried about economic collapse. The only situation where he should be hitting the refresh button is if he’s worried about whether he’s saving enough – and if that’s the case, his focus should be on proactively increasing income or increasing savings, not on whether the market will save him.

My recipe for success is that, if you’re worried about economic collapse, be frugal. Learn how to make things yourself and grow your own food. Learn how to fix things around your house. Build relationships with the people around you. This will help you survive whatever may come.

Of course, I’m doing that anyway and I’m not worried at all about economic collapse. It’s just a good idea in any situation.

Books worth budgeting for

My new book, The Simple Dollar: How One Man Wiped Out His Debts and Achieved the Life of His Dreams, is available in bookstores now. Check out some of the life-changing experiences the book has given readers!

Check out my book, 365 Ways to Live Cheap, available in bookstores everywhere! It's filled with 365 great tactics you can apply to your personal finances, from frugal tips to great ideas for managing your money.